The following are some of the new developments in corporate
tax in the UAE:
The
UAE corporate tax regime will come into effect on June 1, 2023. Businesses will
be liable to pay tax on their taxable profits from the financial year starting
on or after that date. The UAE corporate tax rate will be 9% for all
businesses, except for those that generate more than AED 375 million in taxable
profits. These businesses will be subject to a higher corporate tax rate of
15%.
The
UAE corporate tax regime will include several exemptions and deductions. For
example, businesses that generate less than AED 375,000 in taxable profits will
be exempt from corporate tax. Additionally, there will be deductions for
certain expenses, such as research and development costs.
The
UAE corporate tax regime will be administered by the Federal Tax Authority
(FTA). The FTA has published a number of guidance notes and FAQs on the UAE
corporate tax regime, which can be found on its website.
Here are some of the key features of the UAE corporate tax
regime:
Territorial system: The UAE corporate tax regime is a territorial system,
which means that only businesses that generate income from within the UAE will
be liable to pay corporate tax. The United Arab Emirates (UAE) has recently
adopted a territorial system of corporate taxation.
There
are a number of benefits to a territorial system of corporate taxation. First,
it can help to attract foreign investment. Second, it can promote economic
growth by encouraging businesses to invest and expand within the country.
Third, it can simplify the tax system and reduce the compliance burden on
businesses.
However,
there are also some potential drawbacks to a territorial system of corporate
taxation. First, it can lead to tax avoidance and base erosion. Second, it can
be difficult to administer, as countries need to be able to track the profits
that companies generate in different jurisdictions.
Taxable profits:
Taxable profits are calculated as revenue minus deductible expenses. Taxable
profits are the profits of a business that are subject to corporate tax.
Taxable profits are calculated by subtracting deductible expenses from revenue.
Deductible
expenses are expenses that are incurred for the purpose of generating income
for the business. Some examples of deductible expenses include:
- Cost
of goods sold
- Operating
expenses, such as rent, salaries, and utilities
- Interest
on business loans
- Depreciation
on business assets
Non-deductible
expenses are expenses that are not incurred for the purpose of generating
income for the business. Some examples of non-deductible expenses include:
- Personal
expenses of the business owner
- Capital
expenditures, such as the purchase of new business assets
- Dividends
paid to shareholders
In
the UAE, taxable profits are subject to corporate tax at a rate of 9%. However,
businesses that generate less than AED 375,000 in taxable profits are exempt
from corporate tax.
Here
is an example of how to calculate taxable profits:
- Revenue:
AED 1,000,000
- Cost
of goods sold: AED 300,000
- Operating
expenses: AED 200,000
- Interest
on business loans: AED 50,000
- Depreciation
on business assets: AED 100,000
- Total
deductible expenses: AED 650,000
- Taxable
profits: AED 350,000
The
taxable profits of the business in this example would be AED 350,000. This
amount would be subject to corporate tax at a rate of 9%.
Transfer pricing:
Transfer pricing is the process of determining the prices of transactions
between related parties. Related parties are companies that are controlled by
the same entity or that have a common interest. Transfer pricing is important
because it can be used to shift profits between different countries in order to
reduce a company's overall tax burden.
The
UAE corporate tax regime includes transfer pricing rules. These rules are
designed to ensure that transactions between related parties are conducted at
arm's length prices. Arm's length prices are the prices that would be charged
between unrelated parties for the same or similar transactions.
There
are a number of different transfer pricing methods that can be used. The most
common transfer pricing method is the comparable uncontrolled price (CUP)
method. The CUP method compares the prices of transactions between related
parties to the prices of similar transactions between unrelated parties.
Other
transfer pricing methods include the cost-plus method, the resale price method,
and the profit split method. The choice of transfer pricing method will depend
on the specific facts and circumstances of the case.
Businesses
that engage in transactions with related parties are required to maintain
transfer pricing documentation. Transfer pricing documentation is a document
that shows how the transfer prices for transactions between related parties
were determined. Transfer pricing documentation helps to ensure that the
transfer prices are arm's length prices.
The
UAE Federal Tax Authority (FTA) has published a number of guidance notes and
FAQs on transfer pricing. These guidance notes and FAQs can be found on the
FTA's website.
Businesses
that are operating in the UAE or that are planning to expand into the UAE
should carefully review the UAE transfer pricing rules to ensure that they are
in compliance with all applicable laws and regulations.
Here
are some tips for complying with the UAE transfer pricing rules:
- Identify
all related parties. The first step is to identify all of the companies that
are related to your company. This includes companies that are controlled by the
same entity, companies that have a common interest, and companies that are
associated with your company through directors or shareholders.
- Determine
the prices of transactions with related parties. Once you have identified all
of your related parties, you need to determine the prices of the transactions
that you have with them. You should use an arm's length pricing method to
determine the prices of these transactions.
- Maintain
transfer pricing documentation. You are required to maintain transfer pricing
documentation that shows how you determined the prices of the transactions that
you have with your related parties. Transfer pricing documentation is important
because it helps to ensure that the transfer prices are arm's length prices.
Losses:
Businesses in the UAE can carry forward losses for up to five years and offset
them against future profits. This means that if a business makes a loss in one
year, it can reduce its taxable profits in subsequent years by the amount of
the loss.
There
are a few conditions that apply to the carry-forward of losses in the UAE:
- The
loss must be a genuine trading loss. This means that it must be incurred in the
ordinary course of business and not due to factors such as capital losses or
capital gains.
- The
loss must have been incurred in the UAE.
- The
business must have been carrying on a trade or business in the UAE continuously
since the year in which the loss was incurred.
To
carry forward a loss, a business must submit a loss carry forward claim to the
Federal Tax Authority (FTA). The FTA will then assess the claim and determine
whether the loss is eligible to be carried forward.
Here
is an example of how the carry-forward of losses works in the UAE:
Year
1: A business incurs a loss of AED 100,000.
Year
2: The business generates a profit of AED 50,000. The business can offset its
profit against the loss carry forward from Year 1, which means that it will not
have to pay any corporate tax in Year 2.
Year
3: The business generates a profit of AED 150,000. The business can offset its
profit against the remaining loss carry forward from Year 1, which means that
it will only have to pay corporate tax on AED 100,000 of its profit in Year 3.
The
carry-forward of losses can be a valuable benefit for businesses in the UAE. It
can help to reduce a business's tax burden and improve its cash flow.
Dispute resolution: Businesses in the UAE can carry forward losses for up to
five years and offset them against future profits. This means that if a
business makes a loss in one year, it can reduce its taxable profits in
subsequent years by the amount of the loss.
There
are a few conditions that apply to the carry-forward of losses in the UAE:
- The
loss must be a genuine trading loss. This means that it must be incurred in the
ordinary course of business and not due to factors such as capital losses or
capital gains.
- The
loss must have been incurred in the UAE.
- The
business must have been carrying on a trade or business in the UAE continuously
since the year in which the loss was incurred.
To
carry forward a loss, a business must submit a loss carry forward claim to the
Federal Tax Authority (FTA). The FTA will then assess the claim and determine
whether the loss is eligible to be carried forward.
Here
is an example of how the carry-forward of losses works in the UAE:
Year
1: A business incurs a loss of AED 100,000.
Year
2: The business generates a profit of AED 50,000. The business can offset its
profit against the loss carry forward from Year 1, which means that it will not
have to pay any corporate tax in Year 2.
Year
3: The business generates a profit of AED 150,000. The business can offset its
profit against the remaining loss carry forward from Year 1, which means that
it will only have to pay corporate tax on AED 100,000 of its profit in Year 3.
The
carry-forward of losses can be a valuable benefit for businesses in the UAE. It
can help to reduce a business's tax burden and improve its cash flow.
Dispute
resolution in UAE corporate law can be conducted through a variety of methods,
including:
Negotiation:
This is the most common method of dispute resolution, and it involves the
parties directly communicating with each other in an attempt to reach a
mutually agreeable solution.
Mediation:
This is a process in which a neutral third party (the mediator) helps the
parties to communicate with each other and reach a resolution.
Arbitration:
This is a process in which a neutral third party (the arbitrator) hears the
case and makes a binding decision.
Litigation:
This is the process of filing a lawsuit in court and having the case decided by
a judge.
The
best method of dispute resolution will depend on the specific facts and
circumstances of the case. For example, if the dispute is relatively simple and
the parties have a good relationship, then negotiation may be the best option.
If the dispute is more complex or the parties have a poor relationship, then
mediation or arbitration may be a better option. If the parties cannot resolve
the dispute through other methods, then litigation may be the only option.
Here
is an overview of the arbitration and litigation processes in the UAE:
Arbitration:
Arbitration
is a confidential process, and the arbitrator's decision is binding on the
parties.
- To
initiate arbitration, the parties must agree to arbitrate the dispute and sign
an arbitration agreement.
- The
arbitration agreement will typically specify the rules of arbitration that will
be used and the qualifications of the arbitrator.
- The
arbitration hearing will be conducted in accordance with the rules of
arbitration that the parties have agreed to.
- After
the hearing, the arbitrator will issue a decision, which is binding on the
parties.
Litigation: Litigation
is a public process, and the court's decision is binding on the parties.
To
initiate litigation, one party must file a lawsuit in court.
The
lawsuit will be served on the other party, and the other party will have the
opportunity to respond.
The
case will then proceed through a series of pre-trial hearings, followed by a
trial.
After
the trial, the judge will issue a decision, which is binding on the parties.
Businesses
that are operating in the UAE or that are planning to expand into the UAE
should carefully consider their dispute resolution options. It is important to
have a dispute resolution strategy in place in case a dispute arises.
Here
are some tips for choosing the right dispute resolution method:
- Consider
the nature of the dispute. Is it relatively simple or complex?
- Consider
the relationship between the parties. Is it good or poor?
- Consider
the cost and time implications of each dispute resolution method.
- Consider
the enforceability of the dispute resolution method.
Here
are some of the key benefits of the UAE CT regime:
- Competitive
tax rate: The UAE CT rate of 9% is one of the most competitive in the world.
This makes the UAE an attractive destination for businesses looking to reduce
their tax burden.
- Simple
and efficient tax system: The UAE CT system is designed to be simple and
efficient. Businesses can file their tax returns online and make tax payments
electronically.
- Experienced
tax authorities: The UAE has a team of experienced tax authorities who are
available to assist businesses with their tax compliance obligations.
The
UAE CT regime is expected to have a positive impact on the UAE economy. It will
attract new businesses to the UAE and help existing businesses to grow. The tax
regime will also generate revenue for the government, which can be used to fund
public services and infrastructure development.
